City Hall Goes Back to Financial Issues

By Bill Dries

After a summer break, the concerns about the long-term financial health of Memphis city government go back to the front political front burner at City Hall Tuesday, Sept. 17.

Memphis City Council members will take up a new report on the city’s pension plan that concludes the plan for city employees is unsustainable and “has continued to deteriorate.”

The 40-page report by PricewaterhouseCoopers LLC of Atlanta was delivered to Memphis City Council members over the weekend, and it is up for discussion during Tuesday’s council budget committee session at 10 a.m.

The impact of the most severe recession since the Great Depression of the 1930s is the main culprit, according to the report.

In the fiscal year prior to the onset of the recession, the city’s defined benefits retirement plan for its employees was funded at a level of 104.5 percent. That dropped to 79.8 percent in the next fiscal year that began July 1, 2009, with a $449.5 million unfunded liability.

For the current fiscal year, the plan is funded at a 73 percent level, with an unfunded liability of $682 million.

The fourth page of the 40-page report goes to the core of the different ways of looking at what until now were general numbers.

Over the last two fiscal years, municipal union leaders have contended that the city did not have to put as much toward the unfunded liability as was advocated by some council members, particularly Kemp Conrad.

Their reasoning has been that the city had the money to restore the 4.6 percent pay cut city employees took two years ago, because the city’s investments of the pension fund were doing well.

Not well enough, according to the report, which acknowledges that “despite better than average asset returns for 2010 and 2011, the plan’s funded status has continued to deteriorate.”

“Assuming no other changes, it is estimated that it would require an annual asset return of 13 percent over each of the next 10 years in order to fully fund the plan,” the report continues.

If no action is taken by the city, the funded ratio drops in the next fiscal year to 72 percent, with a $740 million unfunded liability.

If the city takes no action, state leaders in Nashville are certain to issue at least an advisory suggesting city actions, as they did this past May in a critical report from Tennessee Comptroller Justin Wilson on other aspects of city finances.

WHARTON

But Memphis Mayor A C Wharton Jr. has indicated for months he will likely recommend major changes in the city’s retirement plan.

“I can pretty much tell you that those who are hired in the future – they will be few and far between … but I can pretty well tell you they will not be going into a defined benefit program. That’s an easy one to deal with,” Wharton said in July on the WKNO-TV program “Behind The Headlines.”

“You first have to deal with those employees who are vested. That’s where your big number will be,” he added. “Do you say, ‘All right, you will keep your defined benefits but you will pay more?’ Or do you simply say, ‘We’ll just leave that alone and we’ll deal with those employees who are not vested?’”

The PricewaterhouseCoopers report suggests those very options.

All of the issues in the two reports this year critical of city government finances are technical financial planning issues that are much more complex than the projects and initiatives and tax rates that get the lion’s share of attention at City Hall.

But in his May report to the city, Wilson underlined their importance.

“This office strongly encourages the council to look at the fiscal needs of the community, including those that have been less visible due to interfund borrowing,” Wilson wrote.

Wilson also pinned the city’s financial instability to its 2009 debt restructuring through a bond refunding issue known among those in municipal finance as “scoop and toss.” What gets tossed is the city’s debt into future fiscal years, with dramatically increased debt payments due in those out years.

Wilson said that the shifting of funds among the fund balances gave the false impression that the city’s budget is balanced when it is not.